U.S. Credit Swaps Record Biggest Four-Day Rise Since March

May 13, 2013 10:00 AM

May 13 (Bloomberg) -- A gauge of U.S. corporate credit risk rose, adding to its biggest four-day climb in almost two months.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, increased 1.2 basis points to a mid-price of 73.4 basis points at 12:55 p.m. in New York, according to prices compiled by Bloomberg. The gauge has added 4.5 basis points in the past four days, its biggest such advance since the period ended March 25.

Retail sales rose 0.1 percent in the U.S. in April, following a 0.5 percent drop in March, Commerce Department figures showed today in Washington. The median forecast of 81 analysts surveyed by Bloomberg called for a 0.3 percent decline. Investors may be concerned that an improving economy will lead the Federal Reserve to begin tapering its stimulus efforts or raising interest rates.

"Duration risk is at all-time highs," Scott Colyer, who manages $10.5 billion as chief investment officer at Advisors Asset Management in Monument, Colorado, said in a telephone interview. "It doesn’t take much of a move in interest rates to really destroy the total return of a bond portfolio. That’s the risk that bothers us."

The credit-swaps index typically rises as investor confidence deteriorates and falls as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.


Fed Strategy


The Fed has pledged to hold down its benchmark interest rate, set between zero and 0.25 percent since December 2008, as long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent.

Earlier this month the Fed said it will maintain $85 billion a month of asset purchases.

"Fed officials have mapped out a strategy for winding down its bond-buying program and manage highly unpredictable market expectations," RBS Securities Inc. analysts led by Edward Marrinan wrote in a note today. "The timing on when to start is still being debated."


‘Next Catalyst’


The risk premium on the Markit CDX North American High Yield Index rose 3 basis points to 352.8 basis points, Bloomberg prices show.

The average relative yield on speculative-grade, or junk- rated, debt widened 2.9 basis points to 479.8 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

"High-yield bonds and loans continue to benefit from low yields across fixed income," JPMorgan Chase & Co. analysts led by Peter Acciavatti wrote in a May 10 report to clients. "However, with the market searching for the next catalyst, there is an underlying belief that it resides with Fed rhetoric in response to recent stronger economic numbers."


--Editors: John Parry, Chapin Wright


To contact the reporter on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net


To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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